Friday, April 25, 2014

The California Court of Appeal, Second District, recently ruled that a car purchaser need not suffer actual damages as a result of a car dealer's alleged mischaracterization of the down payment toward a car purchase, in order to state a cause of action under California's Rees-Levering Act. The Court also noted that the disclosure statute had been amended to specifically reject the "substantial compliance" rule in favor of the current detailed scheme requiring itemization of certain costs associated with automobile purchases.

Plaintiff consumer ("Consumer") purchased a car from defendant car dealership ("Dealer"), financing the purchase and making a deferred down payment consisting of four payments totaling $2,000 rather than a cash payment at the time of sale. Consumer made the deferred down payment over three months, with the first three payments all being made prior to the second scheduled payment on the car loan.

In the retail installment sales contract, however, Dealer supposedly erroneously entered information about Consumer's deferred down payment on a line reserved for a so-called "Remaining Cash Down Payment" to indicate Consumer had actually made a $2,000 cash payment at the time of sale.

Consumer later filed a lawsuit against Dealer, the financing company, as well as the company that issued a surety bond to Dealer (collectively, "Defendants"), alleging in part that Dealer had mischaracterized the down payment in violation of California's Rees-Levering Motor Vehicle Sales and Finance Act ("Rees-Levering"). Consumer further alleged that Dealer's supposed mischaracterization of the down payment violated California's Consumers Legal Remedies Act and constituted an unfair business practice under California's Business and Professions Code.

The Defendants demurred to the complaint, arguing that Consumer had failed to allege that Dealer had misstated essential terms of the sale, such as the purchase price or the terms of the car loan and that they had substantially complied with the statute. Dealer also asserted that its entering the $2,000 figure on the wrong line of the sales contract was a mere technical violation that did not support a cause of action.

The lower court sustained the demurrers without leave to amend, concluding that Dealer's mischaracterization of the down payment was not actionable because Consumer had suffered no actual loss from the mischaracterization and Defendants had substantially complied with statutory disclosure requirements. Consumer appealed.

The Court of Appeal reversed and remanded as to Dealer and the financing company, ruling that Consumerstated a cause of action under the Rees-Levering Act because Consumer need not have suffered actual damages from Dealer's mischaracterization of the down payment and the substantial compliance rule has been statutorily removed. The Court affirmed as to the remaining surety defendant.

As you may recall, Rees-Levering provides that, except in cases of bona fide error, a car dealer's misstatement or concealment of the terms of a car sale renders the contract unenforceable and allows the buyer to recover the total amount paid to the seller. Rees-Levering also requires car dealers to disclose in a retail sales installment contract all the terms and conditions of sale, including an itemization of the purchaser's down payment reflecting "[t]he amount of any portion of the down payment to be deferred until not later than the due date of the second regularly scheduled installment under the contract . . . ." and "[t]he remaining amount paid or to be paid by the buyer as a down payment." See Cal. Civ. Code §§ 2981.9, 2982, 2983.

Further, Rees-Levering defines a down payment as "a payment that the buyer pays or agrees to pay to the seller . . . at or prior to delivery by the seller to the buyer of the motor vehicle . . . The term shall also include the amount of any portion of the down payment the payment of which is deferred until not later than the due date of the second otherwise scheduled payment." Cal. Civ. Code § 2981 subdivision (f).

In addition, California's Consumers Legal Remedies Act provides a right of action to any "consumer who suffers any damage as a result of the use or employment by any person of a method, act or practice declared to be unlawful" such as "[r]epresenting that a transaction confers or involves rights, remedies, or obligations which it does not have or involve, or which are prohibited by law." Cal. Civ. Code §§ 1770, subd. (a), 1780 subd. (a).

In addressing whether Consumer stated a cause of action under Rees-Levering, the Appellate Court concluded that Dealer violated Rees-Levering both in mislabeling the nature of the down payment as a cash-down payment tendered at the time of sale, and in misstating the actual amount of the down payment. In so doing, the Court stressed that Rees-Levering specifically created separate categories for cash put down at the time of sale and for a deferred payment amount. The Court also noted that Consumer had made three of his four payments prior the second scheduled loan payment date, which payments thus fell within Rees-Levering's definition of a down payment and amounted to less than that indicated in the sales contract. See Cal. Civ. Code § 2982 subd. (a)(6)(A).

Faulting the lower court for focusing on whether Dealer had substantially complied with consumer disclosure requirements and whether Consumer had suffered actual injury, the Court of Appeal pointed out that Rees-Levering specifically rejected the substantial compliance defense. See Cal. Civ. Code § 2983(b)(sales contract remains enforceable if erroneous nondisclosure pertains to certain governmental fees, but may be rescinded for noncompliance with other disclosure requirements such as accurate disclosure of down payment).

With respect to Consumer's allegation that Dealer had violated California's Consumers Legal Remedies Act, the Court, noting that a "tangible increased cost or benefit to the consumer" satisfies the damages requirement, observed that Consumer had asserted that Dealer's supposedly false statements about Consumer's down payment exposed him to potential liability for deceiving the lender and that Dealer's misstatement may have made Consumer eligible for a loan for which he would not otherwise have qualified without the misstatement.

Nevertheless, ruling that Consumer's vague allegations of injury as presented in his complaint did not support a cause of action under the Consumers Legal Remedies Act, the Court remanded to allow Consumer to amend.

Finally, as to the allegation that Dealer had committed unfair business practices by mischaracterizing the down payment and burdening Consumer with a loan for which he was otherwise not qualified, the Court similarly ruled that, although the complaint had not stated a cause of action for unfair business practices, remand with leave to amend was appropriate in this case.

Accordingly, the Court concluded that: (1) the lower court erred in sustaining the demurrers of Dealer and the financing company without leave to amend with respect to the cause of action for violation of Rees-Levering; (2) Consumer could amend his complaint to state causes of action under the Consumer Legal Remedies Act and for unfair business practices against Dealer and the financing company; and (3) the lower court properly sustained the demurrer of the remaining defendant that issued the surety bond to Dealer.

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